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Morgan Stanley Coughs Up $5 Million in Facebook Settlement

Written by: Antoine Gara12/17/12 - 3:10 PM EST

Tickers in this article:
C FB MS

NEW YORK ( TheStreet) -- Massachusetts has settled a $5 million fine with Morgan Stanley (MS) for what it deemed to be improper research tied to the initial public offering of Facebook (FB) .

The state's securities regulator said on Monday that the bank violated the 2003 Global Research Analyst settlement in its role underwriting Facebook's IPO. In the days leading up to the May 18 offering, Morgan Stanley analysts downgraded earnings outlook of Facebook in an internal research report as a result of alleged conversations with company management orchestrated by underwriters

In the wake of Facebook's poor post-IPO performance, the social network and its underwriters faced criticism of selective disclosure on upcoming earnings weakness.

The report questioned Facebook's execution on mobile devices-tied ad revenue, a weakness that pushed shares lower in the company's first two earnings reports as a public company. In a statement explaining the statement Galvin of Massachusetts said that the analyst had improperly communicated with underwriters of the offering.

On May 9 -- roughly a week prior to Facebook's IPO -- the social network indicated in a filing with the Securities and Exchange Commission its advertising revenue growth relative to total users was slowing as a result of mobile devices.

Recently, Facebook's seen its shares recover to just 30% below its $38 a share IPO price as mobile device-based revenue begins to trickle in .

"We are pleased to have reached a settlement with
Secretary Galvin and the Massachusetts Securities Division and
to have put this matter behind us," Mary Claire Delaney, a Morgan Stanley spokesperson said in an e-mailed statement. "Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws."

Monday's settlement follows a late October $2 million fine paid by Citigroup(C) to the Massachusetts regulator.

In that fine, details of leaked non-public information cost one of the bank's analysts his job, and another left the firm as a result of compliance violations related to stock ratings of Google(GOOG) .

What was initially seen as a coup by Morgan Stanley in winning the lead underwriting mandate for Facebook soon turned into a public relations disaster when the largest-ever tech IPO flopped falling roughly 50% in the wake of the offering.

Morgan Stanley, Citigroup and other underwriters of the Facebook IPO and its analysts were prohibited from disseminating any non-public information prior to the offeringr. Bloomberg reported in May that the 33 investment banks participating in the offering would pocketed roughly $176 million in fees related to the offering.

Both Morgan Stanley and Citigroup were among 10 Wall Street investment banks that agreed to the Global Research Analyst settlement. In the wake of the dot-com bust, the Securities and Exchange Commission found a host of conflicts of interest inside research and underwriting units of the banks. The fidelity of sell-side research, the settlement found, took a back seat to more lucrative underwriting activity.